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August 14, 2014

5 Big Effects of Beijing Coal Ban

Coal is on the way out in Beijing, and more cities in China could soon follow the capital’s lead. Dangerous smog levels and violent civil unrest have led the city not just to order cutbacks on industrial development, a ban in further expansion for a number of polluting industries and even the move of numerous industrial sectors out of the city altogether to the neighboring region of Hebei, but to announce that by the end of 2020 the use of coal will be banned in Beijing.

Increasingly violent demonstrations by a growing middle class throughout the country have turned the government away from its coal-centric “growth at any cost” policy to a somewhat more environmentally friendly “everything else” strategy. And the repercussions will be felt far beyond coal markets.

The move wasn’t sparked so much by a hunger for cleaner air as it was for political stability. “China had been willing to approach pollution as the price of growth, but its undermining party legitimacy. The party wants to maintain power, so if there are social ramifications it undermines power,” according to Daniel Rohr, director, basic materials at Morningstar.

But that change in focus will affect the coal market globally, as well as alternative energy markets and other, perhaps more surprising, sectors. Here are 5 effects of the Beijing coal ban.

1. Additional coal bans

Other cities falling prey to industrial pollution will likely follow Beijing’s lead, according to Rohr. “Some other first-tier cities could [ban coal, such as] Shanghai, Shenjen,” Rohr said, adding that additional bans were most likely along China’s eastern seaboard. And while “the coal burned in Beijing proper is a tiny, tiny slice of the coal burned in China,” the ban itself is “a powerful symbolic gesture.”

2. Imports will fall dramatically and exports will likely resume before long

“[F]or a very, very long time, China didn’t need to import any coal at all,” said Rohr. “It’s only in the last five or six years that it turned to foreign supplies.” However, a massive buildup in rail transport that can bring coal from China’s own mines in the north to areas where it’s needed, combined with newer, more efficient coal plants that deliver way more bang for the buck and an equally massive energy infrastructure buildup that can carry and store energy generated from alternate sources (wind, solar, hydro), will make China far more self-sufficient and even allow the export of coal to resume.

In Morningstar’s Basic Materials Observer Burned Out: China’s Rebalancing Heralds the End of Coal’s Growth Story, Rohr and his colleagues examined the decrease in coal use that they said will far outpace what is predicted by other agencies, including the U.S. Energy Information Administration and the International Energy Agency.

“The past few years of heavy coal imports by a coal-rich China is likely a historical anomaly. Growing domestic production and falling demand suggest that China could revert to its prior status as a major coal exporter by 2017,” the report said.

“It’s not hard to envision the chain reaction,” added Rohr. “China has been importing coal principally from Indonesia and Australia, “both of which are ramping up their capacity to produce.” However, when China moves from a major coal importer to importing very little, “that coal will need to find another home,” he said.

Indonesian and Australian coal will likely instead be rerouted to India, which “will displace South African coal, which will have to get rerouted into the Atlantic market and try to find a new home in Europe. In turn, with low-cost South African coal and [also] Columbian coal arriving on European shores, it’s U.S. producers who lose out. The U.S. is the highest-cost [producer],” said Rohr.

“We would be the first to lose out in that scenario,” Rohr said. “U.S. coals get displaced [in Europe] by cheaper South African and Columbian coals, and in the U.S. by cheaper gas and restrictions [on coal use]. Those coals then have no place to go. So the chain reaction is that a new railroad in China puts central Appalachian coal mines out of business.”

3. Alternative energy sectors will grow and pricing will change, both inside and outside China

Rohr said that as China’s demand for wind turbines and solar expands, prices will rise. Since nuclear energy will also be in greater demand, costs there will rise as well. Someone might “own a uranium mine in Canada, but a ramp-up of nuclear power plants will tighten uranium prices globally and raise prices,” no matter where the Canadian mine owner sells the ore.

In addition, China’s focus on greater efficiency in sectors that produce as well as transport and store energy could lead, said Rohr, to “more research on other power, rail [and] electric infrastructure.”

4. Sectors outside the energy sector will be hit.

China is revamping its economic output to reduce its electricity intensity—the amount of electricity required to contribute to each dollar of GDP. “Infrastructure and real estate have pushed China’s electrical intensity,” said Rohr. Both require heavy energy use.

However, as the country moves away from unrestrained building of both infrastructure and housing/commercial structures its “electricity intensity falls, and it will diminish the electricity intensity of the real estate growth model and every industry that feeds into that—steel, mining, copper and zinc, producers of mining equipment, construction equipment ... such a big economic force is far-reaching and doesn’t hit just coal,” Rohr said.

5. China could lead the way in reducing greenhouse gas emissions.

While this might be the most surprising, it also has its own global implications. Because China’s switch from coal is accompanied by greater efficiency in its newer coal plants, as well as massive improvements in rail infrastructure for the transport of domestic coal within the country and long-distance ultra-high-voltage lines to handle the transport of alternative energy from its source to destinations throughout the country, electricity demand—although expected to continue to grow—will actually increase far less than expected.

Slowing growth and greater efficiency together, on a scale as large as China’s, leads to a rebalancing of energy usage and demand that the Morningstar report said would be enough to allow the requirements of the IEA’s 450 Scenario—the policy changes necessary to slow CO2 emissions enough to limit the increase in global temperatures to 2 degrees Celsius and eventually stabilize at around 450 parts per million—to be met.

China’s notorious air pollution is commonly measured by PM2.5, which refers to particulate matter less than 2.5 microns in diameter. Such particles can’t be seen individually with the naked eye, but in the concentrations that make up Beijing’s smog, they’re all too easy to see. According to the Morningstar report, “The environmental benefits of a rebalancing China extend well beyond its borders. The combination of factors that cuts PM2.5 concentrations will do the same for CO2 emissions.”

And because the effects of China’s change in policies are so far-reaching, Rohr and his colleagues, in their largely contrarian view of China’s departure from coal, believe that the IEA’s 450 Scenario will be met without any additional stringent policy changes.